Graduate School of Economics and Management, Tohoku University

This paper presents an endogenous growth model in which R&D improves product quality and venture capital supports these qualityenhancing activities both financially and non financially. In the model, the venture capitalists' skill in evaluating entrepreneurs' innovative abilities plays a key role in achieving innovation and economic growth. When their skill is sufficiently low, neither innovation nor economic growth occurs even if entrepreneurs are abundant in the economy. Moreover, insufficient market size discourages entrepreneurs from engaging in R&D activities. Therefore, competent venture capitalists and a sufficiently large market are indispensable to the economy's long-run growth.